May 142019

Toronto-based FinTech startup Koho announced the close of a $42 million Series B round today, led by Portag3 Ventures, with participation from Greyhound Capital and other unnamed strategic investors. Sources familiar with the deal put the company’s post-money valuation north of $100 million. Koho has raised $52.6 million to date.

Launched publicly in 2017, Koho positions itself as a modern alternative to Canada’s traditional banking oligarchy. While it doesn’t have a Canadian banking license, it does have partnerships with Visa and Peoples Trust Company to provide similar services: e-transfers, ATM and purchase use with the Koho prepaid card, insights on spending habits, and financial coaching. The company says it now has over 120,000 accounts and has reached $500 million in annualized transactions.

Koho’s new participating investor, Greyhound Capital, is a UK-based VC with sector expertise in challenger banks, having invested in both N26 and Revolut. It’s a strong signal.

This is Koho’s second funding round led by Portag3, which also led the company’s $8 million Series A round in 2017. The startup’s connection to Portag3 (and the money behind it, Power Financial), runs deeper, however. Koho raised an undisclosed bridge round in July 2016, led by Power Financial with participation from angel investor Adam Felesky, who later became Portag3’s CEO. Following the company’s Series A round, Felesky and Power Financial SVP and Portag3 executive chairman, Paul Desmarais III, joined Koho’s board of directors, along with Wealthsimple co-founder and CEO, Michael Katchen (Power and its subsidiaries own a majority stake in Wealthsimple).

The overlapping interconnections are entirely by design. For years, Desmarais has been working to build through Power and Portag3 what this publication has glibly dubbed Canada’s FinTech Justice League: an archipelago of financial services distributed via a portfolio of startups to combat the institutional incumbents. Borrowell provides the lending, Wealthsimple the investing, Koho the spending (and saving – 17 percent of the money that comes into Koho ends up in a savings account), etc. Opportunities within Portag3’s portfolio to partner and stack services on top of an overlapping customer base abound.

Both the size of Koho’s new funding and the round’s familiar lead are notable. Inside rounds (i.e., a round entirely or predominantly led by existing investors) typically give VCs fits because they’re stuck pricing their past investments rather than having someone else validate them. It can also send mixed signals to the market, meaning a lack of interest from external investors, a necessary bridge round to additional funding or an exit, or a double-down from the lead to keep away a frothy list of suitors. As Spring Lane Capital’s Rob Day describes it, “in short, inside rounds can be a signal that a company is doing great, doing OK, or is close to collapse.”

Koho has several data points pointing towards a positive interpretation. For one, $42 million in funding at a significant jump in valuation is no bridge round. For another, the round matches the pricing of similar FinTechs at Koho’s current size. In 2017, UK challenger bank Monzo (Koho can’t technically be considered a challenger bank because it has no Canadian banking license, but the feature set is similar) raised a £22 million Series C at an £87 million post-money valuation with a similarly sized user base. The company is currently closing in on a £2 billion valuation as it pursues a US launch (now might be a good time to mention that Koho’s new participating investor, Greyhound Capital, is a UK-based VC with sector expertise in challenger banks, having invested in both N26 and Revolut).

Koho CEO and founder Daniel Eberhard.

“This new funding is both validation of what we’ve done and a vote of confidence for the work left to do,“ Daniel Eberhard, founder and CEO of Koho, told BetaKit.

That said, $42 million is a lot of growth capital for a company with 120,000 account signups. Eberhard’s sense of validation comes from a belief that Koho is positioned for a “better outcome by owning a really small percentage of a larger market.” The reason? “We are going for the lynchpin of the financial relationship. That is the bet that Portag3 is making.”

“We are going for the lynchpin of the financial relationship. That is the bet that Portag3 is making.”

Being the lynchpin means acting as the daily touchpoint for the way Koho’s users spend, save, and deposit money. Eberhard said that close relationship leads to a much higher customer lifetime value than other financial services. It’s also why the company cares so much about its 80 Net Promoter Score (if incumbent financial institutions beat FinTech startups on consumer trust, they most certainly lose on likability).

“The two things that are essential to our success are a great customer experience and [development] velocity,” Eberhard said. “Our theory is that if our roadmap is public and our users participate in that and we have a community we can listen to, and that we can deploy technology and new versions of the app faster than anyone else, we have a higher probability chance of finding value.”

On the development side, Koho has rolled out two new features this year: joint account support, and a tool to help users find hidden bank fees. Eberhard told BetaKit that the new funding will be dedicated to product development over customer acquisition (75 percent of Koho’s current account growth is organic or through referrals), as new product features will continue to drive what he said was the company’s best-in-class ARPU and churn. Those metrics would likely also be aided by some Portag3 portfolio partnerships noted above now that Koho has the funding and customer base to capitalize, but Eberhard declined to comment on specific plans.

As the company rises in prominence as part of Portag3’s FinTech suite, the CEO did note, however, that Koho is taking steps to diversify its own portfolio. That includes a restructuring of the company’s board, adding independent board members while reducing Portag3’s presence to make Koho a more palatable investment vehicle for larger private equity placements.

“The intention of this funding is to do two things: it’s to continue to accelerate Koho as the market leader in Canada, and to position the company for longer term private equity and capital plays,” Eberhard said. “Part of that is restructuring the board so we look more and more like a traditional venture-backed company and less like a Portag3 company.”

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